Lower salaries and no options: the optimal structure of executive pay

Lower salaries and no options? On the optimal structure of executive pay

Ernst Maug and Ingolf Dittmann

No 07-41, Papers from Sonderforschungsbreich 504

Abstract: We estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 US CEOs. The model is widely used in the compensation literature, but it predicts that almost all of the CEOs in our sample should hold no stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies. For a typical value of relative risk aversion, almost half of the CEOs in our sample would be required to purchase additional stock in their companies from their private savings. The model predicts contracts that would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We investigate a number of extensions and modi.cations of the standard model, but .nd none of them to be satisfactory. We conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts. One reason may be that executive pay contracts are suboptimal.

Keywords: Executive compensation; stock options (search for similar items in EconPapers)
JEL-codes: G30 M52 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (143)

Downloads: (external link)
https://madoc.bib.uni-mannheim.de/2527/1/dp07_41.pdf

Related works:
Journal Article: Lower Salaries and No Options? On the Optimal Structure of Executive Pay (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mnh:spaper:2527

Access Statistics for this paper

More papers in Papers from Sonderforschungsbreich 504 Contact information at EDIRC.
Bibliographic data for series maintained by Katharina Rautenberg ().